5 ways for landlords to cut costs.
You couldn’t miss the headlines last week announcing the Bank of England’s decision to raise the base rate for the 3rd time in 5 months to 5.25%. This takes it to the highest level in almost six years. All this is having a very painful effect on landlord’s cash-flows. Each 0.25% rise increasing interest rates on a standard £100,000 loan by approximately £20 a month. This means that the same loan has seen its interest rate bill rise by over £140 a month since rates bottomed at 3.5% in July 2003. The question is how landlords respond to this worsening situation. The answer is simple; like any business facing rising expenses they must look at ways of reducing their costs if they are to survive and prosper.
Here at Property Hawk we have consulted our expert panel of buy-to-let advisors and worked out the five steps to cutting your costs. In order to illustrate the effect of these suggestions we have come up with a benchmark property to which the following applies: Value £120,000, mortgage £100,000 interest only, Rate 6% & cost £500 pcm; rent £500pcm, management fees 10% pa. Total costs £7250 pa. The Property Hawk team reckon it is possible to reduce your costs by up to 25% on a standard let just by following these simple suggestions:
1. Take back your management
Many landlords have decided to out source the day to day management responsibility of their properties to a letting agent. This is fine when interest rates are at rock bottom and property prices soaring as it is far more profitable to utilise your time in implementing an aggressive acquisition strategy.
However with a standard buy-to-let mortgage costing about 6% and rental yields are only between 4-5%; many landlords need to face the reality that this is no longer a luxury they can afford. I myself have decided only this year to take several properties away from a letting agent. Letting agents typically charge between 8-12% of the gross rent for on going management. On a £120,000 property producing £6000 of rent a year, this would amount to £600 per annum. On top of this many agents are VAT registered which puts on an additional 17.5% or £105 pa. Then there are the hidden costs. Your agent may be one of those that issues your tenant with a new agreement every six months for which they then charge you a further £80 plus VAT. A far cheaper option would be to let the tenancy run on to become a periodic tenancy where each party simply carries on under the same terms of the original agreement until they wish to give notice. Other hidden costs can arise by using an agent.
For example, when maintenance work is carried out. Often unknown to particularly the novice landlord, some agents have agreements with certain ‘favoured’ contractors. This means whilst you are paying £200 to have the boiler fixed, the plumber is only receiving £125; the other £75 is paid to the agent in the form of a commission or introducers fee from the tradesman. It’s quite conceivable that an extra £150 costs will be incurred in work done by contractors during the year where either a commission has been paid or the agent has failed to secure a competitive price.
TOTAL SAVINGS £1024
SAVINGS = 14%
Many landlords and particularly those who have had a property for several years will have historic mortgage products. This is very likely where a fixed rate period has ended and the mortgage has reverted to the company’s standard variable rate. By shopping around landlords should be able to shave between 0.33-0.5% of the interest charged over the term of the loan. Even a 0.5% reduction in the rate will save just over £40 per month or £480 during the course of a year. Most products are accompanied with fees and charges so these must be factored into the calculations. Use our Mortgages service to find the best current rates on BTL mortgages availiable. However, given the savings can run for many years it is often still beneficial to swap. Other advantages are that you can choose the most appropriate product to your current situation. For example with fixed rate product you will insulate yourself against future rate rises.
For a list of the most comprehensive rates available in the market have a look at our BTL Mortgage Search. Our experts maintain that even taking into account charges over the long term it is possible to save on average £350 per annum on mortgage costs.
TOTAL SAVINGS £375
SAVINGS = 5%
3. Active management
This is tied to the first tip. By taking management back from an agent landlords will not only save on fees but potentially it is possible to reduce void periods i.e. the period when the property is lying empty and not earning rent. Traditional wisdom is that you should allow for one months void each year for each property. We do not accept this. Your aim should be zero. Accepting though that this will not always be possible, we still think that by being pro-active with marketing it is possible to reduce any voids period by at least 2 weeks. Ensure that your property is featured on the Internet on a site such as Lettingweb. In the current buoyant rental market there should be no reason why your property is sitting empty. This equates to a saving of £230 pa.
TOTAL SAVINGS £230
SAVINGS = 3%
One of the bigger fixed costs incurred by landlords is their insurance. It is vital that you are fully insured as failure to do so would cost you dear should disaster strike. However, it is still possible to save money and be properly insured. For instance some landlords will take out separate contents insurance to guard against damage to white goods and carpets. This is not actually necessary as many buildings insurance will cover this automatically as fixtures and fittings. Also if your policy has been in place for a long period of time it may well have been increased more than is required. Go to the BCIS insurance calculator or read the recent Absolute Beginners feature within the magazine section to check what your sum insured should be. One of the cheapest policies is available through Alan Bosewell Insurance Brokers. Backed by Norwich Union the policy which has been specifically tailored for landlords automatically includes all white goods in its’ cover. Our panel estimate that an annual saving of £75 pa could be made by shopping around for the best deal.
TOTAL SAVINGS £75
SAVINGS = 1%
5. FREE Property management software
If you think that managing your property yourself is a daunting prospect then you shouldn’t. Property Hawk has all the information within the Landlords Bible to guide you through the process. It also has easy to use software within the Property Manager to keep track of your day to day finances together with a free Tenancy Agreement for you to download and use.
All this is available for free on the www.propertyhawk.co.uk website. This saves you £15 for the book, £10 for the AST, £100 for the software. In total £125.
TOTAL SAVINGS £125
The first 4 points should save you up to a wacking £1704 or 23.5% of your annualised costs. These are just some suggestions but they do highlight how it is possible to dramatically cut your bills when times get hard.